Emerging markets take toll on U.S. stock indexes

Equity index futures are slumping Friday as investors digest the impact of emergency rescue measures by emerging market central banks whose priority it is to alleviate pressures on domestic currencies. The front page of London’s Financial Times pits India’s activist central banker against the Federal Reserve as his string of monetary measures to stave off inflation and underpin confidence in the rupee flies in the winds of tapering by the FOMC. His call for global policy coordination is falling on deaf ears. Adding to the negative tone are corporate earnings results from Amazon (NYSE:AMZN) and an earnings warning from Walmart (NYSE:WMT).

S&P index futures (CME:SPH14) have already broken fresh ground for the week trading down by 18.25-points (-1.02%) to 1763, in response partly to deeper declines for European benchmarks. Interestingly, Wednesday’s session (for futures at least) carved out the entire weekly range using the March contract as it surged to 1801.25 before sliding to 1764 at the session low. Friday’s session kicking off below the established range will be watched carefully by momentum traders anticipating an extension to a lower range. Traders will also be watching out for how the VIX index responds as demand for insurance inevitably steps up ahead of the weekend. The CBOE volatility gauge closed Thursday at 17.00 and below its midweek peak at 19.00.

Interest rate increases from Turkey, India and South Africa this week alone served to briefly spark vigor back into investors’ strides. However, the week is ending on a bad note as investors reflect on the earlier catalyst indicating potential sluggish growth for the world’s number two economy – China. And so pressure has now returned to haunt the key emerging market currencies whose central banks have so far raised the cost of borrowing but pressure valves are also now being tested elsewhere. The Hungarian forint, for example, slumped to a two-year low Friday against the euro currency.

Speaking of which, the U.S. dollar (NYBOT:DXH14) is once again proving the main beneficiary of growing fears. The dollar appears to have gained ground in all-weather conditions this week. When markets buckled at the start of the week the dollar advanced. And on the rebound the world’s reserve currency was also bid higher following negative talk from a European central banker whose comments dented confidence in the single currency. The euro currency (CME:E6H14) is ending the week at its lowest level against the dollar for all of January and is teetering on support at exactly $1.3500. Meanwhile the British pound is also weakening versus the greenback at $1.6463. While that is well above its lowest point for the month on account of a growth spurt, the pound is still well below last week’s high at $1.6668 – a 30-month peak. Finally, the dollar is holding its own against the Japanese yen, which typically roars in times of turbulence. The dollar currently buys ¥102.23.

And at the end of the week in which the FOMC further tapered its bond buying scheme, yields at the benchmark 10-year (CBOT:ZNH14) yield are lower at 2.65%. Note that this is lower than at the time the Fed first shocked bond markets with a December-time tapering. Granted this is a function of added stress to equity markets but the magnitude of the move in bond yields provides some solace for the central bank as it counters accusations that it is sucking money away from global capital markets.

About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.